Topic: Audit Reporting

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AAA – May 2016 – L3 – Q6 – Audit Reporting

Discuss audit work and written representation letter for legal claims, outstanding balances, and investments.

Question

Bob Removals Limited is a removals company. In the year ended December 31, 2015, the company made a trading profit of N800,000. You are the manager in charge of the audit.
The following issues have arisen:

(i) A customer is suing the company for N1 million for damage caused to antique furniture. The company is defending the claim and believes that the furniture was a reproduction as opposed to antique and therefore worth only N100,000.
(ii) A balance due from Safe Storage in respect of sub-contract work, of N300,000, has been outstanding for over six months. Your firm has been asked by Bob Removals’ accountant not to write to Safe Storage for direct confirmation of this amount as the latter company objects to such letters. You have been assured by the accountant that the relationship between the two companies is good and that the outstanding balance will be paid.
(iii) Bob Removals has recently invested in four new removal vans and is currently carrying out extensive refurbishment of its premises. As a result of this expenditure, the company has reached its overdraft limit of N500,000.

Required:

For each of the above issues:
a. State, with reasons, the audit work that you would expect to find when undertaking your review of the audit working papers for the year ended December 31, 2015.
b. Draft the relevant sections dealing with these issues of the written representation letter you would wish the directors to sign.

Answer

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Tags: Audit Procedures, Investment, Legal Claim, Outstanding Balance, Written Representation
Level: Level 3

Topic: Audit Reporting

AAA – May 2016 – L3 – Q4 – Audit Reporting

Review the suitability of proposed audit opinions for four audit clients and suggest necessary modifications.

Question

You are the manager responsible for four audit clients of Globe & Co, a firm of Chartered Accountants. The year-end in each case is June 30, 2015.
You are currently reviewing the audit working paper files and the audit seniors’ recommendations for the auditors’ reports. Details are as follows:

a. Red Co. Limited is a subsidiary of Yellow Holdings Plc. Serious going concern problems have been noted during this year’s audit. Red will be unable to trade for the foreseeable future unless it continues to receive financial support from the parent company. Red has received a letter of support (‘comfort letter’) from Yellow Holdings Plc.
The audit senior has suggested that due to the seriousness of the situation, the audit opinion must at least be qualified ‘except for’. (5 Marks)

b. Edo Co Plc has changed its accounting policy for goodwill during the year from amortisation over its estimated useful life to annual impairment testing. No disclosure of this change has been given in the financial statements. The carrying amount of goodwill in the statement of financial position as at June 30, 2015, is the same as at June 30, 2014, as management’s impairment test shows that it is not impaired.
The audit senior has concluded that a modification to the opinion is not required but suggests that attention can be drawn to the change by way of an emphasis of matter paragraph. (6 Marks)

c. The directors’ report of Prompt Co Limited states that investment property rental forms a major part of revenue. However, a note to the financial statements shows that property rental represents only 1.6% of total revenue for the year. The audit senior is satisfied that the revenue figures are correct.
The audit senior has noted that an unmodified opinion should be given as the audit opinion does not extend to the directors’ report. (4 Marks)

d. Audit work on the after-date bank transactions of Twinkle Co Limited has identified a transfer of cash from Star Co. Limited. The audit senior assigned to the audit of Twinkle has documented that Twinkle’s finance director explained that Star commenced trading on July 20, 2015, after being set up as a wholly-owned foreign subsidiary of Twinkle.
The audit senior has noted that although no other evidence has been obtained, an unmodified opinion is appropriate because the matter does not impact on the current year’s financial statements. (5 Marks)

Required:
For each situation, comment on the suitability or otherwise of the audit senior’s proposals for the auditors’ reports. Where you disagree, indicate what audit report modification (if any) should be given instead.

Answer

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Tags: Accounting Policy Change, Audit opinion, Directors' Report, Emphasis of Matter, Going Concern, Subsidiary Transactions
Level: Level 3

Topic: Audit Reporting

AAA – May 2017 – L3 – Q5 – Audit Reporting

Explain the IAASB Clarity Project's objective and describe new requirements in various revised ISAs.

Question

You are an Audit Manager of Lobito James & Co., a firm of Chartered Accountants. You are aware of some significant changes and new requirements in the Revised ISAs as a result of the IAASB Clarity Project issued in October 2008 that are expected to impact the following audit procedures:

(a) Communicating with those charged with governance (ISA 260).
(b) Materiality in planning and performing an audit (ISA 320).
(c) Audit considerations relating to an entity using a service organisation (ISA 402).
(d) Evaluation of misstatements identified during an audit (ISA 450).
(e) External confirmation (ISA 505).
(f) Auditing accounting estimates, including fair value, accounting estimates and related disclosures (ISA 540).
(g) Related parties (ISA 550).

You are required to:

i. Explain the objective of the IAASB Clarity Project. (1 Mark)

ii. Explain TWO new requirements in each of the revised ISAs listed above. (14 Marks)

Answer

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Tags: Audit Requirements, Audit Standards, Auditing Procedures, IAASB Clarity Project, ISAs
Level: Level 3

Topic: Audit Reporting

AAA – May 2017 – L3 – Q1 – Audit Reporting

Prepare briefing notes covering benefits of IAASB auditor reporting project, sections of ISA 700 report, and explanation of Key Audit Matters.

Question

You are Aremu Ana, an Audit Partner at Danda Audit firm who has kept pace with the International Auditing and Assurance Standards Board’s (IAASB) new and revised reporting standards which lay the foundation for the future of global auditor’s reporting and improved auditor communication.

You have concluded arrangements with the Human Capital Department of the firm to train the firm’s audit team, which includes trainees, supervisors, and managers. The training programme has been fixed to hold in two months’ time. You are now preparing notes that will assist in educating the audit team and make them appreciate the new standards.

Required:

Prepare a training briefing note which:
a. Clarifies the intended benefits of the IAASB’s new auditor reporting project. (5 Marks)
b. Identifies and describes the different sections of the new auditor’s report as required by ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements. (20 Marks)
c. Explains the term ‘Key Audit Matters’ (KAM), stating any TWO matters an auditor is required to take into account in the determination of KAM in accordance with ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. (5 Marks)

Answer

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Tags: Auditor's Report, IAASB Reporting Standards, ISA 700, ISA 701, Key Audit Matters (KAM)
Level: Level 3

Topic: Audit Reporting

AAA – May 2019 – L3 – Q6 – Audit Reporting

Assess the impact of lost audit journals, actions required under ISA 570, and communication duties of auditors.

Question

During the recent audit of Ogundu Commercial Limited, a privately owned trading company, you discovered that the former chief accountant resigned immediately after the conclusion and approval of the previous audited financial statements. The new chief accountant came in during the month of May and was working at familiarizing himself with the systems and financial operations of the company; and also ensuring that the accounting records are ready for the board of directors’ quarterly meetings and finalizing the accounts for the next audit.

Due to the pressure of work, the chief accountant lost part of the journals raised by the previous auditors but proceeded to finalize the accounts. This resulted in least expected financial performance for the year. The previous auditor is a sole practitioner and is now deceased.

The directors are concerned because the financial statements would be used to seek facilities from banks. The success or otherwise of the facility will impact the operations of the company and may lead to a reduction in both operation and staff engagement.

Required:
a. Evaluate the effect of the loss of the audit journals on the financial statements and the factors you would consider, as auditors, in drafting your report. (5 Marks)
b. In accordance with ISA 570, evaluate the actions required of the auditors in relation to the observed misstatement. (5 Marks)
c. Discuss the content of the communication expected of the auditors to the client before and after the audit, other than the auditors’ report. (5 Marks)

Answer

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Tags: Audit evidence, Audit Reporting, Financial Statements, ISA 570
Level: Level 3

Topic: Audit Reporting

AAA – Nov 2013 – L3 – AII – Q15 – Audit Reporting

Determine the audit opinion expressed when there is an extreme scope limitation and insufficient audit evidence.

Question

Opinion expressed when the possible effect of a limitation on scope is an extreme case and the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial report is………………..opinion.

Answer

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Tags: Audit evidence, Disclaimer of Opinion, Scope Limitation
Level: Level 3

Topic: Audit Reporting
Series: NOV 2013

AAA – Nov 2013 – L3 – AII – Q10 – Audit Reporting.

Determine the error acceptable in a population confirming the sample result aligns with audit objectives.

Question

The maximum error in the population that the auditor can accept as being consistent with the conclusion that sample result confirms achievement of the audit objective is known as……………..error.

Answer

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Tags: Audit Objective, Audit Standards, Population Error, Sampling
Level: Level 3

Topic: Audit Reporting
Series: NOV 2013

AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

Question

Romeo and Juliet Plc is an indigenous company incorporated on March 5, 2012. The entity operates in the oil sector of the economy, which has experienced severe income decline over the past years. The global oil prices hit a record low of about $28 per barrel in 2019 and 2020, further plunging the company and the industry into a downward slide in income generation. The company is also affected by foreign exchange difficulties faced by most companies in the country resulting from increased regulation of foreign exchange. Regular cases of oil theft, pipeline vandalism, and insecurity have also affected the operations of major international oil companies, which are the entity’s major customers. As a result of the above, the company recorded the following in its books of account:

Financial losses: The company has made consistent losses from the financial year ended December 31, 2017, to date.
Current liability position: The company’s current liabilities exceeded its current assets.
Negative net operating cash position: The company has maintained a negative net operating cash position from December 31, 2017, to date.

Furthermore, the company’s performance has worsened as a result of a decrease in sales and an increase in expenses.

The largest proportion of the current liabilities is the intercompany borrowings, which accounted for 62% (2020 – 45%) of the total current liability balance. The borrowings stood at N1.5 billion, N1.6 billion, and N2 billion for the financial years ended December 31, 2019, 2020, and 2021, respectively. The finance costs in relation to the borrowings stood at N230 million in the year ended December 31, 2021 (2020- N214 million).

The company has currently defaulted on a number of its contractual obligations with its directors, and there was no directors’ remuneration in the current year due to its continuous loss-making position.

At the pre-audit meeting with management of Romeo and Juliet Plc, your firm (the auditors) were informed that, in the year, the company was involved in a business combination with another oil company. To pay for the cost of acquisition, an additional intercompany loan was obtained because of the poor financial position of the company. In addition, the company’s major investment in an associated company was disposed of. The business acquisition proposal has all necessary regulatory approvals. It was approved at the meeting of the directors and annual general meeting of the company in the previous year and disclosed in the company’s prior year financial statements as business matters.

After the meeting with management, you have started the preparation for the year-end audit, and in compliance with regulatory requirements and auditing standards, a Key Audit Matter should be inserted on the opinion page.

Required:

(a) Evaluate the criteria that will help the engagement team determine what qualifies as a matter requiring significant auditor’s attention and can be classified as a Key Audit Matter. (8 Marks)

(b) Discuss the factors that will determine matters of most significance to be communicated to those charged with governance. (10 Marks)

(c) Discuss the criteria for what must be included in the description of a Key Audit Matter on the audit opinion. (6 Marks)

(d) Evaluate what should be done, assuming that you have determined that there are no Key Audit Matters to be reported in the above scenario. (6 Marks)

Answer

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Tags: Audit opinion, Communication with Governance, ISA 701, Key Audit Matters, Risk Assessment
Level: Level 3

Topic: Audit Reporting

AAA – Nov 2013 – L3 – A – Q18 – Audit Reporting

This question assesses knowledge of the main users of financial reports that auditors focus on.

Question

The main users of financial reports that auditors need to be primarily concerned about are:
A. Management and directors of the company
B. The general public
C. Banks and other financial institutions that provide working capital
D. Suppliers
E. Shareholders of the company

Answer

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Level: Level 3

Topic: Audit Reporting
Series: NOV 2012

AAA – Nov 2013 – L3 – A – Q15 – Audit Reporting

This question assesses the primary purpose of sending a letter of enquiry to a legal firm regarding client litigation.

Question

The main reasons why auditors send a letter of enquiry to the legal firm handling litigation or claims on behalf of their client is to provide:
A. Auditors with weak position in client litigation and claims
B. Auditors with written submission and statement of claims to the court
C. Information concerning the progress of outstanding cases to date
D. Auditors with corroborative audit evidence
E. Auditors with impact of legal opinion on financial statements

Answer

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Tags: Audit evidence, Legal claims, Letter of Enquiry, Litigation
Level: Level 3

Topic: Audit Reporting
Series: NOV 2012

AAA – Nov 2013 – L3 – A – Q4 – Audit Reporting

This question tests understanding of the primary purpose of audit working papers.

Question

The primary purpose of audit working papers is to
A. Support the underlying concepts included in the preparations of the basic financial statements
B. Aid the auditors in adequately planning their work
C. Aid the auditors in adequately circularising the client’s debtors
D. Provide a point of reference for future audit engagements
E. Identify area of weaknesses so as to conduct extended substantive and compliance tests

Answer

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Tags: Audit Procedures, Audit Working Papers, Documentation
Level: Level 3

Topic: Audit Reporting
Series: NOV 2012

AAA – Nov 2013 – L3 – A – Q1 – Audit Reporting

This question tests understanding of considerations for report writing in investigations.

Question

Which of the following may NOT be taken into consideration when writing a report of an investigation?
A. The language of the report must take into consideration the technical knowledge of the users
B. The computation should be detailed in the body of the report
C. The subject-matter of the investigation must be clear from the heading of the report
D. Any reservation should be clearly stated in the body of the report
E. The users of the report must be clearly identifiable

Answer

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Tags: Audit, Investigation, Report Writing, Reporting Standards
Level: Level 3

Topic: Audit Reporting
Series: NOV 2013

AAA – Nov 2012 – L3 – SA – Q13 – Audit Reporting

Determining the correct date to include on an audit report.

Question

The auditor should always date the audit report on a date:

A. The financial statements were approved
B. After the directors have approved the financial statements
C. When the directors approved the audit work
D. The audit assignment was completed
E. The audit commenced

Answer

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Tags: Audit Procedures, Audit report, Financial Statements Approval, Report Date
Level: Level 3

Topic: Audit Reporting
Series: NOV 2012

AAA – Nov 2011 – L3 – SAII – Q3 – Audit Reporting

Responsibility for audit conduct and opinion expression in financial statements.

Question

The responsibility for the conduct of the audit and expressing an opinion on the financial statements in a firm of Chartered Accountants rests with the……….

Answer

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Tags: Audit Responsibility, Chartered Accountants, Financial Statements, Opinion Expression
Level: Level 3

Topic: Audit Reporting
Series: NOV 2011

AAA – Nov 2011 – L3 – SA – Q17 – Audit Reporting

Identifies the technique involving ratios and statistical analysis to obtain audit evidence.

Question

The computation of ratios and trends and the use of statistical formula to obtain audit evidence is:

A. Hot review
B. Audit sampling
C. Substantive test
D. Analytical review
E. Audit review

Answer

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Tags: Analytical review, Audit evidence, Ratio Analysis, Statistical Techniques, Substantive Testing
Level: Level 3

Topic: Audit Reporting
Series: NOV 2011

AAA – Nov 2011 – L3 – SA – Q7 – Audit Reporting

Determines the correct date for an auditor’s report based on audit standards.

Question

The auditors’ report should be dated on the day that the:

A. Report is delivered to the client
B. Field work is completed
C. Fiscal period under which the audit ends
D. Review of the working papers is completed
E. Board meeting approves the accounts

Answer

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Tags: Audit Completion, Audit Date, Auditor's Report, Reporting Standards
Level: Level 3

Topic: Audit Reporting
Series: NOV 2011

AAA – May 2024 – L3 – SB – Q3b – Audit Reporting

Determine if the opinion should be unmodified, assess if it requires a Material Uncertainty paragraph, and discuss modified report form and content.

Question

A client company has prepared draft financial statements for the year ending December 31, 2020. In February 2021, a legal claim was made against the company, claiming substantial damages. The company’s lawyers have advised that the claim has less than a 50% chance of success. If the claim succeeds, the company would have sufficient cash resources to meet the claim in full.

The matter is disclosed in the draft financial statements in a note, as a material contingent liability.

Required:

Advise if the audit opinion should be unmodified, and if so, should the report contain a ‘Material Uncertainty Related to Going Concern’ paragraph? (3 Marks)
Discuss the form and content of a modified auditor’s report. (7 Marks)

Answer

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Tags: Contingent Liability, Financial Statement Disclosure, Legal Claim, Modified Auditor’s Report, s: Audit Opinion
Level: Level 3

Topic: Audit Reporting
Series: MAY 2024

AAA – May 2024 – L3 – SB – Q3a – Audit Reporting

Discuss forming an appropriate opinion due to scope limitations and evaluate drafted audit report extracts.

Question

You are the Manager-in-charge of the audit of Moonshine Limited. Your auditor’s report for the financial year ended December 31, 2019, was signed without modification in February 2020. The scope of the audit for the year ended December 31, 2020, has been limited because the company’s Chief Executive Officer fled the country in April 2020, taking the accounting records with him.

You have identified a valuable training opportunity for Richard, a member of your audit team. As a training exercise, you have asked Richard to draft the extracts for the basis of opinion and opinion paragraphs that may not be standard wording in an unmodified auditor’s report.

Richard’s draft extracts were produced as follows:

Basis of Opinion (extract)
“However, the evidence available to us was limited because accounting records were missing from early in the year and it was not possible to reconstruct them completely.”
Opinion (extract)
“Because of the possible effect of the limitations in the information available to us, we do not express an opinion on the financial statements.”

Required:

Discuss the principal matters relevant to forming an appropriate opinion on the financial statements of Moonshine for the year ended December 31, 2020. (8 Marks)
Evaluate the suitability of Richard’s draft extracts. (2 Marks)

Answer

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Tags: Audit opinion, Auditor's Report, Basis of Opinion, Evidence Limitation, Scope Limitation
Level: Level 3

Topic: Audit Reporting
Series: MAY 2024

AAA – May 2024 – L3 – SA – Q1 – Audit Reporting

Discuss features in audit report proposal for Anything Goes Bank and differentiate audit, assurance, and attestation engagements.

Question

Anything Goes Microfinance Bank Limited was incorporated in 2018 to meet the financial needs of low-level customers. The Management Accounts of 2019 revealed that the bank has a shareholders’ fund of N2.1 billion, total assets of over N5 billion, and customer deposits of N2 billion. It is the largest microfinance bank in Kito. Today, the bank continues to be the core banker for small and medium-scale enterprises and accounts for over 70% of the business turnover in Kito. It is the only indigenous microfinance bank that is fully owned by Kito shareholders. The bank directors are elected by key shareholders and represent all shareholders in both the public and private sectors.

The bank currently has a total employee establishment of over 350. With the liberalization of the economy and globalization of businesses, the bank embraced new challenges by becoming a commercial bank in 2020 and changed its name to Anything Goes Bank Limited. The change of Chief Executive Officer and the management at Anything Goes Bank Limited in early 2020 ushered in a new era where new ideas are adopted and managers reclaimed managerial responsibilities. The main objective was to come up with innovative business strategies that would ensure the bank serves its core customers effectively.

However, to reposition, the bank embarked on reviewing its corporate strategic plan, building on existing strengths, specifically addressing growth and development, information technology and business management, enhanced service delivery, profitability, and capital growth. The strategic plan for the bank has been drawn up with the theme “Managing for Value.” The strategies are based on four perspectives: people, customers, financial performance, and risk and control. The goal of the plan is to ensure that the bank meets shareholders’ expectations, provides a common language, ensures satisfaction for chosen customer segments, and fosters motivated and prepared staff. A focus on these four perspectives would result in customer satisfaction, efficient processes, and enhanced employee motivation.

To remain relevant and meet customers’ needs, the bank believes it must revisit its operating structure and expand its business. The bank aims to become a globally recognized commercial bank in Africa. Management believes a dynamic and flexible approach to strategic change and performance is essential, particularly when facing turbulence in its operating environment. A review of operations shows an increasingly complex environment with an accelerating rate of change, putting performance pressure from the government, public, and other stakeholders.

The bank is interested in early reporting but lacks the software capacity to handle current transaction volumes. Many staff members are not proficient in International Financial Reporting Standards, especially concerning complex financial instruments. A recent tax audit resulted in back duty assessment and other unresolved queries. Additionally, the bank faces issues with inefficient service delivery, public distrust in the banking sector, weak corporate governance, and rising bad loans.

The bank’s management has prepared a master plan with grand strategies, such as product development, market expansion, turnaround, and joint venture strategies. To achieve these grand strategies, functional strategies, including marketing, operations, organizational management, and financial strategies, are detailed in the master plan. However, implementation faces obstacles, including government policies, poor leadership, limited IT capacity, lack of funds, staff capability, and an inadequate corporate culture.

The bank has an audit committee, but it has not been performing optimally due to a lack of structured operations. It is also behind on some reporting requirements and has been fined by regulatory authorities. Although the bank views itself as small, it still requires an auditor to examine its accounts and express an opinion. Management is considering changing its auditors due to the transition to a commercial bank and has decided to request proposals for a new auditor appointment. Delays in attestation and assurance reporting to regulators have led to fines.

A friend of yours, whose father is a management staff member of the company and a student of accountancy, has informed you of these developments and asked for explanations to enlighten management before they send out a proposal for audit services.

Required:

a. Discuss the key features needed in an audit report which should be included in the proposal for audit services of Anything Goes Bank Limited. (10 Marks)

b. Explain the type of assurance service that the auditor of the bank should provide. (6 Marks)

c. List the duties the audit committee of the bank ought to be performing. (8 Marks)

d. Distinguish amongst audit, assurance, and attestation engagements. (6 Marks)

Answer

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Tags: Assurance Service, Audit Committee, Audit Engagements, Audit report, Corporate Governance, Financial instruments, Regulatory Compliance, Strategic Change
Level: Level 3

Topic: Audit Reporting
Series: MAY 2024

AAA – Nov 2018 – L3 – Q7 – Audit Reporting

Explanation of Emphasis of Matter, Other Matter, and conditions for modified opinions in audit reporting

Question

You are the partner responsible for the audit of JJ Industries Limited for the year ended 31 December 2017. The final audit has been completed, and you are aware that there is guidance for auditors relating to audit reports – ISA 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.

Required:

a. i. Explain “Emphasis of Matter paragraph” and provide three examples and the potential situations in which such a paragraph may be used. (6 Marks)

ii. Define “Other Matter paragraph” and give two examples of the use of such a paragraph. (4 Marks)

Note: You are not required to produce draft paragraphs.

b. ISA 705: Modifications to the Opinion in the Independent Auditor’s Report requires the auditor to modify their opinion in the audit report. Discuss the two situations under which the auditor must issue a modified opinion in line with ISA 705. (5 Marks)

Answer

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Tags: Emphasis of Matter, ISA 705, ISA 706, Modified Opinion, Other Matter
Level: Level 3